LLM2100 - Syndicate profits: taxation: transactions in foreign currencies (1)

Lloyd's syndicates maintain records in only three currencies: sterling, US dollars and Canadian dollars. All income is denominated in one of these currencies and the funds are normally retained in that currency until they are used to meet liabilities, or distributed as profits. At each year-end, the managing agent converts to sterling all income, expenditure, assets and liabilities denominated in US/Canadian dollars. The profit or loss is always expressed in sterling.

This can produce some odd results.

• The RITC premium may be calculated and paid in a mix of currencies, but is included in accounts at its sterling year-end equivalent. Different year-end rates will be used by the receiving syndicate, and the RITC premium received will not therefore match the RITC paid. The effect of this is that the foreign exchange differences on the RITC are included within the value of the premium received, rather than being shown as a separate item. The EFL of brought and carried forward by run-off syndicates ( LLM2070) will also not match for the same reason.
• The maximum premium income a syndicate can receive is calculated according to a rate of exchange set in the underwriting year, which may be different from the rate used in the accounts. Recorded income may therefore not match the quoted figure of capacity utilisation.

There will usually be a foreign exchange difference included in the underwriting account. Transactions that can give rise to foreign exchange differences in the accounts include

• liabilities denominated in one currency paid using a different currency
• assets of one currency converted into another for instance to meet a shortfall.

In general, the method of accounting for foreign currency at Lloyd’s produces the correct tax result, but see LLM2110 for examples where tax adjustments may be required.